More restraint as investors wield new powers

A quarter of Australia’s top 300 bosses have been forced to drop or forgo their annual cash bonuses this year, with boards pushing executive pay into long-term shares and options to avoid investor protests.

An 8 per cent drop in annual cash bonuses this year means that chief executives’ take-home pay rose by just over 1 per cent as dozens of companies overhauled pay to avoid a “strike" under the government’s controversial two-strikes rule.

Leading CEOs including
Rio Tinto
’s
Tom Albanese
,
BHP Billiton
’s
Marius Kloppers
,
Paul O’Malley
at
BlueScope Steel
and
Alan Joyce
at
Qantas
gave up most or a part of their annual cash bonus this year.

The Australian Financial Review’s 14th annual survey of executive salaries reveals that the total packages of the chief executives of the top 300 listed companies averaged $2.47 million this year, a pay rise of 6 per cent from $2.33 million the year before.

Australia and New Zealand Banking
boss
Mike Smith
was this year’s highest paid CEO with statutory reported pay of $9.67 million, followed by
Westpac Banking Corporation
’s
Gail Kelly
on $9.59 million and BHP’s Mr Kloppers on $9.58 million, whose total remuneration all fell this year.

Coles managing director Ian McLeod remained the country’s highest-paid executive on $14.8 million, though his pay also fell from $15.6 million last year.

It comes after a tough financial year for the sharemarket, which fell almost 11 per cent before recovering about 7 per cent since July.

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About half of the top 300 companies also delivered negative returns for shareholders last financial year.

The 6 per cent increase in pay was largely a factor of a 7 per cent rise in long-term incentives – the accounting value assigned to shares and options granted for the year – from $689,374 to $734,607, which CEOs might never receive.

But governance experts expressed concern that a 7 per cent increase in base pay from $955,572 to $1.02 million might be being used to compensate CEOs for the reduction in bonuses such as Myer’s Mr Brookes.

His total pay jumped from under $1 million to $3 million this year despite missing his bonus.

The restraint in bonus payments had been driven by the threat of investor protests under government reforms which can trigger a spill of the board if more than 25 per cent of investors vote against a company remuneration report for two years running.

Investors like MLC have targeted bonuses this year such as the 26 per cent “strike" against
Lend Lease
because of a $2.2 million bonus to its chief executive,
Steve McCann
.

But directors are concerned that the rule is being misused by some investors after major shareholders
Gina Rinehart
,
Solomon Lew
and
Nathan Tinkler
caused “strikes" or near “strikes" at
Fairfax Media
,
Globe International
and
Whitehaven Coal
respectively.

“We have already seen examples in 2012 where power to vote ‘no’ on pay has been exercised by shareholders seeking to assert influence over a board for reasons unrelated to pay,"
Stockland
chairman
Graham Bradley
said in renewing calls for the “strike" threshold to be raised to 50 per cent to avoid “mischief".

Fifty-three companies including
Cochlear
, Lend Lease,
M2 Telecommunications
and Fairfax Media have received a “strike" from investors so far this season.

There are more than 600 meetings remaining for the year, so the number of “strikes" is on track to pass last year’s total of 108.

And only three,
Globe International
,
Rey Resources
and
Penrice Soda,
are facing a spill of their board after a majority of shareholders passed a spill motion. The much-maligned
Cabcharge
is another top 300 company expected to face a second “strike" on Wednesday.

The chief executive of skate-wear company
Globe
, Matthew Hill, complained that its whopping 85.7 second “strike" was delivered by shareholders Solomon Lew and investment bank Kidder Williams, who own less than 9 per cent of the company.

“We have a scenario where a tiny percentage can deliver a board spill, which I am sure was not the intention of the legislation," Mr Hill said.

ANZ chairman
John Morschel
said that in the majority of cases the rule wasn’t being abused.

“I might have all sorts of debate about why 25 per cent, why two strikes and what happens as a result, but I think it has forced most company boards to focus on the issues of remuneration," he said.

Wesfarmers and Centro director
Charles Macek
said the 8 per cent drop in annual bonus payments was a reflection of tougher market conditions and “the mood of restraint".

“Bonuses are very much a function of the short-term performance of companies and the economy has been patchy," he said.

Mr Bradley said a number of boards were now deferring a greater portion of CEO bonuses and the appointment of about 20 new CEOs this year had also given boards an opportunity to negotiate new pay contracts.

“A number of CEOs only received 50 per cent or less of bonuses this year and a number of companies are now paying their bonuses in deferred shares rather than cash," he said.

A pay expert at Guerdon Associates, Michael Robinson, said the proxy firms which advised major shareholders how to vote had been very tough on short-term bonuses and had asked companies to “prove it" before they would support the payments.

But Australian Shareholders’ Association chief executive Vas Kolesnikoff said that often the CEOs didn’t deserve the bonus and there had been an element of “tokenism" in giving them up.

“In many cases it reflects the sub-performance of the companies, write-downs and restructures," he said.

Dean Paatsch, director of governance firm Ownership Matters, also warned that tougher bonus targets would be undermined if base pay continued to rise.

“There has been a push for a long time to put bonuses more at risk, but what it is not meant to do is to lead to base [pay] jumping.

“You would have to question what gains have really been achieved for investors [in aligning executive pay to performance]," Mr Paatsch said.

But Benjamin Morris, head of pay at Hay Group, said the increase could be explained because CEOs had been coming off a number of years of restraint in base pay.

“And I am not surprised to see long-term incentives going up as directors recognise there needs to be a shift back towards a longer-term focus," he said.

Tabcorp
chief executive David Attenborough and
Transurban
’s Scott Charlton were among a handful of the top bosses to receive 100 per cent of their annual bonuses this year.

AGL
’s Michael Fraser,
Centro Retail
’s Steven Sewell,
Dexus
’s Darren Steinberg and
Lend Lease
’s Mr McCann were among other top CEOs to take home more than 90 per cent of their bonuses.

While the push into longer-term incentives has largely been welcomed, governance expert at Blackrock Pru Bennett warned that remuneration consultants had made performance hurdles for long-term incentives increasingly complex and not necessarily appropriate.

In 2005, two-thirds of companies had just one performance measure but now two-thirds of companies had more than one measure, she said.

“The introduction of the two-strikes rule means boards may become even more cautious to avoid difficulties with shareholders and remuneration consultants reinforce that conformity."